Multiple-case study on P3 and
the G6 alliance
Name:
T.J.A. Iaccarino
Student nr:
6058388
Institution:
Amsterdam Business School
Study:
MSC Business Studies
Specialization:
International Management
Course:
Master Thesis
Supervisor 1:
E. (Erik) Dirksen, MSC
Supervisor 2:
Dr. J. (Johan) Lindeque
Date:
24-06-2014
Abstract
This paper elucidates on the mainstream merger and acquisition- (M&A) and
strategic alliance literature, then specifies on maritime M&A’s and strategic
alliances, and in particular on the partnership between the largest
container-vessel companies in the world allied in the P3 and G6 alliances.
Given the fact that the mainstream M&A literature is known, but the
implications of the partnership between these container-carriers is unknown and
regulation exists, the primary data are gathered through in-depth interviews.
This will be the case since this agreement has yet to be completed and approved
by several institutions regarding anti-trust regulation.
The findings show that both P3 and G6 perform better by forming consortia and
from a legal perspective both P3 and G6 are allowed under the presupposition to
honour and provide added value for clients and consumers.
Keywords
MSC, Maersk, CMA-CMG, P3, G6, APL, Hapag-Lloyd, HMM, MOL,
NYK-line, OOCL, Maritime Sector, Shipping Company, Merger,
acquisition, M&A, Strategic Alliance, Federal Maritime Commission,
Ports, hinterland transport, Port authorities, Horizontal-, Vertical alliance
1.1 Introducing the maritime sector
In order to enhance full understanding of the maritime sector and the reason why mergers, acquisitions and strategic alliances are executed, it is important to give a complete elucidation on both the historic context of the sector and the strategic ideology of working together in order to increase performance in terms of economical efficiency. Therefore, the two alliances on which the primary data is gathered will be expounded later on in the paper1.
Within todays maritime sector, there are at least a hundred shipping companies, which all have their own container ships, or chartered ships, and conduct services throughout the world’s waterways. These shipping companies all transport containers that are coded and named as TEU’s: twenty-foot equivalent unit(s) (Talley, 2000:934). The TEU is a standard container measure that is applied in the shipping sector to simplify container processing, and is also used to classify shipping companies in general (market share) rankings (Talley, 2000). Whereas a shipping company is defined as “a fleet of ships, with a common ownership or management, which provides a flexible service, at regular intervals, between named ports, and offers transport to any goods in the catchment area served by those ports and ready for transit by their sailing dates (Stopford, 1997:512)
The most conventional waterways are between Europe, the America’s, the Far-East went initially via Cape of Good Hope and later on via the Suez Canal- and Oceania (CNX, 2009). Maritime transport has been modified by mankind due to the fact that there have been major adaptions to economic convenience mechanisms, like the creation of the Panama Canal between the Atlantic Ocean and the Pacific Ocean in 1913 and the creation and opening of the Suez Canal in 1869 that established a connection between the Mediterranean Sea and the Red Sea (Haskin, 1914; Por, 1978). The main reason for shortcutting the maritime routes is for economic reasons, due to lesser the time carriers are underway, the lesser the fuel costs are for shipping companies and lesser carriers will be exposed to (external) risks. In fact, this is important considering that capital costs of fuel according to the Bunker Fuel Index represent between 25%-33% of the operating costs of a ship (Alexandrou et al., 2014). This is an
important fact considering that the maritime supply chain, which represents the maritime, port and logistics market that enables the transport of goods from the producer to the consumer, encompasses and transports 90% of the global market trading (Moreira, 2012; Chang, 2013).
1 Page 27-29 set out the multiple-case study by introducing insights on P3 and G6.
Panyides and Wiedmer (2011) add that shipping companies play a prominent role in
facilitating international trade, not just by enabling the physical transport of the cargoes, but also through their involvement in the commercial and marketing aspects of global trade. Directly related to the fact that a major share of the world’s merchandise is transported per container vessels, there is huge market for shipping companies, of which some operate solely, some were acquitted, some merged and some tried to set up a common product or service via strategic alliances.
1.2 Mergers, acquisitions and strategic alliances in maritime sector
M&A’s and strategic alliances have been adopted multiple times within the maritime sector. Major alliances in the past were “The Grand Alliance” and the “The Global Alliance”. The first major alliance was the Global Alliance, which was set up in 1994 by APL, OOCL, MOL, and Nedlloyd. The objective was to set up an integrated Europe-Far East service (Heaver et al., 2000:4) Secondly, there was “The United Alliance”, which was formed in 1997. The United Alliance involved Hanjin, DSR-Senator, and Cho-Yang (Heaver et al, 2004). The playing field of the shipping companies changed drastically when P&O Nedlloyd was created. This was a merger between P&O Containers and Nedlloyd Lines. Therefore, there was a reorganization of the two most important global alliances; the Grand Alliance and the Global Alliance. This merger formed the “New World Alliance” in 1998 (Heaver et al., 2004:4). According to Heaver et al. (2010) “These mergers took place to rationalize activities, reduce costs, and create significant economies of scale, all of which are conductive to
establishing a major market player.”
1.3 The maritime supply-chain
As world economies become ever more globalized and interlinked, international logistics and maritime (shipping and port) industries are experiencing challenges as well as enjoying greater business opportunities (Dong-Wook Song & Lee, 2009:2).
Dong-Wook and Lee (2009) add that there has been some convergence of Maritime Transport and maritime logistics, and this can be attributed to the physical integration of transport modes driven by containerization and the evolving demands of end-users that require the application of logistics concepts to the use of these modes and the achievement of logistics goals.
The maritime supply chain consists of producers/ shippers, shipping companies, domestic and international ports, transport companies and clients, where shipping companies occupy the
largest part of the maritime supply chain and are therefore the biggest players in the maritime market.
Next in line are ports, where vessels are unloaded and containers are prepared for further transport. Shipping companies are obliged to pay fees in order to have access to ports and to have their vessels unloaded. These are called slot costs and preparation costs (Port Authorities Rotterdam, 2014).
Transport companies exist in multiple forms and occupy different sectors within the market. Transport companies come in the form of forwarding agents and individually operating companies. Forwarding agents have direct contacts with shipping lines and usually have contracts with shipping lines to cover the remaining route between ports and the client. The individually operating transport company does (usually) not have direct contacts with shipping companies, but does have contacts with forwarding agents. This form of transport is lowest in hierarchy within the supply-chain. Both forwarding agents and individual transport companies convey via road transports.
Another possibility to transport is through inland navigation, which delivers freight via domestic rivers and canals and is more cost-efficient when larger amounts of containers have to be delivered at geographically strategically points or with larger amounts of TEU’s. This form usually is more efficient apropos of road transports due to the possibility to generate economies of scale in terms of ship size respectively to lorry transports. This form of hinterland transport is a continuance of liner shipping, but on a smaller scale.
Finally, there is railway transport that combines economies of scale, geographically distant destinations and is mostly used to transport containers to surrounding countries.
The complete maritime supply chain is displayed in figure 1.
Figure 1: The maritime supply chain
1.4 Introducing the alliance partners of P3 and G6
As the alliance name probably already gave away, P3 consists of three partners, whilst G6 overarches six shipping companies. P3 is of bigger magnitude and the partners are structurally bigger than those of G6, therefore P3’s partners will be elucidated first. In fact, introducing these companies is structured according to Alphaliner’s (2014) top-100 that is attached in the appendix.
Maersk, or the A.P. Moller-Maersk Group, is the biggest shipping company in the world since 1996 and their county of origin is Denmark. Maersk was founded in 1904 and the
headquarters is still in Copenhagen, Denmark. Maersk employs around 25,000 employees and has subsidiaries in over 125 countries. Maersk also owns today’s biggest vessels with capacity over 18,000TEU (Maersk, 2014; ShippingWatch, 2014).
The second partner is Mediterranean Shipping Company, or MSC. MSC is founded in Geneva by one of Naples’ biggest entrepreneurs Gianluigi Aponte in 1970, when the first vessel was bought. MSC initially focused on the Africa-Europe trade and MSC’s success initially was based on Aponte’s innovative way of vessel-capacity creation and cost-efficiency through transforming oil ships into container vessels. MSC ordered its first new vessels in 1994 and MSC expanded the Europe-Africa route with Australia and Asia, which led later on to a direct line between Europe and China (Mscgva, 2014; Swissships; 2001).
CMG CMG completes the P3 picture and is ranked at the third within Alphaliner’s (2014) top-100. CMA CMG is founded in 1978 in Marseille by Jacques Saade and employs over 18,000 people worldwide. Together with MSC CMA CMG are the world’s biggest shipping companies that are still family-owned and CMA CMG’s main vision is based on
innovativeness and environmental features (CMA CMG, 2014).
G6 consists of the following shipping companies: Hapag-Lloyd, APL, MOL, OOCL, NYK-Line and HMM.
Hapag-Lloyd was founded as a merger in 1970 between the two biggest German carriers Hamburg-Amerikanische Packetfahrt-Actien-Gesellshaft (HAPAG) and the Norddeutscher Lloyd (NDL). The company was sold in 1998 to TUI AG, and TUI AG acquired the Canadian carrier CP Ships in 2005, which led Hapag-Lloyd to become the 6th biggest liner company in the world. (Hapag-Lloyd, 2014).
Ranked 7th is APL. APL is most definitely one of the oldest carriers given the fact that APL was founded in 1849 during the California Gold Rush. APL started its fleet with steamer vessels in the 19th century and is America’s biggest container carrier today (APL, 2014). Next is Mitsui O.S.K Lines, or MOL. MOL has resemblance with APL given the fact it is Japan’s oldest carrier to do ocean transports. Initially, Miike coal was founded in 1878 and merged with O.S.K Lines in 1884. MOL was the first to change the industry standard of 35 days for the Yokohama-New York route to less than a month and was the first to have an automated vessel in 1961. In 1998 MOL entered the New World Alliance and decided to join G6 in 2013 (MOL, 2014). MOL is ranked 10th on the Alphaliner (2014) chart.
The fourth alliance partner is OOCL. OOCL is an abbreviation for Orient Overseas Container Line and was founded in 1947 in Shanghai by C.Y. Tung. OOCL was the first carrier to be certified for environmental awareness with its Safety, Quality, and Environmental (SQE) Management System and by introducing its gas-reduction program into the fleet OOCL environmental pioneering position was enforced again (OOCL, 2014).
The fifth G6 partner is NYK-Line. The Japanese Nippon Yusen Kaisa, or NYK-Line, was formed through the merger of the Japanese carriers Yuben Kisen Mitsubishi and Kiodo Unyo Kaisha in 1885 and still today Line is still part of the Mitsubishi Group. In 1914 NYK-Line owned the first Japanese ship that went through the newly built Panama canal. After WWII, NYK-line was one of the hardest sanctioned Japanese companies and in order to adapt to the American demands NYK-Line diversified its operations in liners, trampers and tankers in order to generate growth. NYK-Line is ranked as 12th biggest container carrier (NYK, 2014).
Finally, the smallest alliance partner is HMM. HMM is an abbreviation for Hyundai Merchant Marine and is Korea’s biggest container carrier. The firm was founded in 1976 and operated initially on the Far East-Middle East route, both in bulk and containers. In the 1980’s HMM began operating on the Far East, Western and Eastern US routes, including the Gulf of Mexico. In the 1990’s HMM started working together with Japanese K-Line in order to be more competitive on the Far East-North America route and had contracts with Volvo and Saab, both Swedish car producers, given the fact that HMM provided three of the world’s largest car carriers, with 6,000+ car capacity, and the acquisition of seven of the world’s biggest container carriers, with 5,500TEU capacity each. HMM entered the New World Alliance in 1998 with APL and MOL and in 1999 HMM opened the largest public container terminal in Korea, named Busan. Finally, last year HMM decided to join G6 in order to stay sufficiently competitive (HMM, 2012).
1.5 Thesis set-up
In order to give a full and clear elucidation on the subject, the paper has been structured and aligned as follows.
The first chapter introduces the subject and the history of mergers, acquisitions and strategic alliances in this particular sector, and given a full description of the maritime supply chain in terms of hierarchy, cooperation and association in combination with the introduction of the shipping companies on which the focus will lie throughout the paper.
Within the second chapter, the literature review, mainstream literature regarding M&A and strategic alliances will be expounded. The literature review chapter is an extremely important feature of the paper given the fact that this chapter is to be seen as the core of this multiple-case study paper. A further distinction will be made between legal- and economics-based literature since the alliances are formed in consonance with financial motives, whereas in terms of legal accessibility there might be some boundaries for (future) alliances in the forms of antitrust regulation and legal organs that monitor the activity within the (maritime) market. Within the literature review section the literature gap is defined, which is a guiding factor throughout the thesis.
The third chapter defines the theoretical framework. This chapter will both expound the two cases P3 and G6 in terms of set-up, loops, amount of included vessels, strategic plans, as the propositions that will guide through the findings and discussion section based on the M&A literature analysed in the second chapter. The propositions will also represent elements of the multiple-case study set-up within the same chapter.
The fourth chapter integrates both the findings section as well as the discussion section in order define an integrated picture and to systematically test the findings in relation to the M&A literature and the propositions that are defined in the third chapter. The normally separate chapters findings and discussion are integrated given the fact that the dimensions used both reflect and categorize the findings, as well as the literature described in the chapter two.
The next two chapters encompass the managerial implications in which I shall try to bridge from a higher level of abstraction towards direct suggestions in order to process the problems that are expounded through the primary-data process and therefore could guide managers in increasing efficacy within their companies, whereas the seventh chapter focuses on the future research. This chapter will also look at the biases and difficulties that were found throughout the research process in order to sketch a plan for further elucidation on this phenomenon.
The penultimate chapter will be the conclusion and I finalize this thesis with the
acknowledgements section. Cause concealment requests of certain individuals due to conflicts of interest with my subject and their company policy, only the names of the individuals that wanted to be acknowledged shall be displayed. In order to honour the requests of the
interviewees to evade exposal, the formal job titles will not be presented and there will be no leads towards these people, due to company policy.
2.1 Literature review
Considering the described phenomena in the introduction there is a need to elucidate further on the named terminology like M&A’s, strategic alliances and economies of scale. These terms are mentioned abstractly and therefore need to be specified. The goal within the literature review is to connect the dots literature-wise. In order to systematically explicate these phenomena it is key to work from general literature towards literature that is explicitly applicable within the maritime sector, to specify further on the exact research topic that is served in this paper.
2.2 Research question
What are the positive- and negative consequences in terms of effectiveness and what are the legal restrictions and boundaries by forming maritime alliances?
2.3 Literature gap
Firstly, the term effectiveness focuses primarily on economic efficiency and the service based-characteristics of the sector. The notion that economic efficiency and the service-based character are both important determinants in the maritime sector and can also be seen as complements of one another. In order to enhance the level of understanding of both these terms and their assembly, I have integrated these terms and these will be further explicated later on in the thesis.
Secondly, since that there is sufficient literature available on (maritime) mergers and acquisition, another point of focus would be on economic gains in relation to anti-trust regulation by looking at P3, and G6. These are the two biggest container shipping alliances in the world and due to scale opportunities there are efficiency gains to be accomplished for these parties and scale deficiencies for other players in the market due to increasing costs and power. These alliances have not yet been elucidated from both a legal and economic
perspective. Within this study I would like to focus also on the role of ports within the maritime sector and establishing if ports are active or passive actors within the network.
2.4 Mergers, acquisitions and strategic alliances as a deductive framework
Growth of companies is key within economic theory. There are two distinct possibilities when discussing growth: organic- and inorganic growth (Johnson, Scholes & Whittington, 2011). Johnson et al. (2011:327) stress that organic growth is to be explained as “the pursuit of strategy relying on the company’s own resources”. Johnson et al. (2011:327) elaborate on this by stating that “relying on the organisation’s internal resources is the natural first option to consider”. Considering the abovementioned, organic development means that organisations grow based on their internally possessed resources to increase their revenue and increase their market share.
Adversely, inorganic growth is defined as the growth in the operations of a business that arises from mergers of takeovers, rather than an increase in the companies own business activity (Investopedia, 2014).
Inorganic development is sub-divisible in three main configurations: mergers, acquisitions and strategic alliances. Important to state is that M&A’s and strategic alliances create economic value (Alexandrou et al., 2014). Supporting Alexandrou et al. (2014), Chang (2013) states that mergers or acquisitions are a common method to make a company rapidly increase its market share. Notteboom (2004:90) states that “the economic rationality for mergers and acquisitions is rooted in the objective to size, growth, economies of scale, market share and market power. Heaver et al. (2000) agree and state that bigger market share increases the firm’s power, also achieved through vertical mergers and alliances. Also Rossi and Volpin (2004) agree and add that M&A’s is the reallocation process of control over companies. To place these consideration is perspective, the best way to increase economic reach and market share fast is to grow inorganically.
Johnson et al. (2011:327) define acquisitions as a firm taking over the ownerships (equity) of another. A synonym for an acquisition is a ‘takeover’2. In general acquisitions are done for value-maximisation related to shareholder returns. Although there are cases where acquisitions are not driven by value-maximizing motives due to target related internal utility for the management board rather than shareholder interest (Cartwright & Schoenberg, 2006).
2 The terms acquisitions and takeover may be used interchangeably within this paper.
However, their overall conclusion was that the majority of the transactions are motivated by value creating opportunities (Cartwright & Schoenberg, 2006).
Doz and Hamel (1998) argue that strategic alliances are set up in order to create value, but the risk of value destruction is a non-neglectable threat. Value creation in strategic alliances is somehow different than they did in traditional partnerships, like joint ventures, by focusing on a wide range of economic and strategic outcomes. Doz and Hamel (1998) argue that strategic alliances in general need to focus on a new perspective, which captures multiple strategic ways of creating value. In fact, there are three categories each with different important parameters: will the alliance create value, will value creation endure the test of time and will the partners reconcile conflicting priorities and concerns? Within the first category complex strategic assessment in combination with a value-capture emphasis is most important, and the other parameters that need to be considered are handling complex co-specialization and being in motion (Doz & Hamel, 1998). The second category, which bases on time and progress focuses on the ability to change targets, striking multiple bargains, creating and maintaining options and very important contributing to competitiveness. The third category in the value-creating process is focuses on collaboration and competition, the risk of unbalanced dependence, and enlightening the partner’s mutual interest (Doz & Hamel, 1998). These categories have to be seen as stages in time, where being in business might become more complex through losing straight focus or a changing market environment. Doz and Hamel (1998) argue that strategic alliances will be able to create value by taking these categories and parameters into account.
Value destruction on the other hand is to be seen as negative consequences of forming alliances and value destruction aligns with Prashant and Harbir’s (2009) notion that 30-70% of M&A’s and strategic alliances fail to create the opted value and lose money instead of creating value. According to Elmuti and Kathawala (2001) there are multiple processes that create value destruction within strategic alliances. One of the main problems that might enhance value destruction is a clash of cultures and incompatible personal chemistry within firms. Elmuti and Kathawala (2001) argue that a cultural clash, so integration problems, is probably one the biggest problems corporations in alliances face today. These cultural problems consist of language, egos chauvinism and different attitudes to business that can all make it rough.
Another determinant for value destruction that Elmuti and Kathawala (2001) discuss is lack of trust. Risk sharing is the primary bonding tool in a partnership. In fact, these scholars (2001) state that commitment and failure rates are determinants for pointing the failure finger at
alliance partners. Building trust is the most important and yet difficult aspect of a successful alliance (Elmuti and Kathawala , 2001:208). In fact, shifting the blame does not solve the problem, but increases the tension between the partnering companies and often leads to alliance ruin (Lewis, 1992).
The third determinant for value destruction according to Elmuti and Kathawala (2001) is lack of clear goals and objectives. Many strategic alliances are formed for the wrong reasons and this surely will lead to disaster in the future. Many companies enter into alliances to combat with industry competitors and the key values for successful alliance forming may in that case not be present. Elmuti and Kathawala (2001) argue that dissimilar objectives, inability to share risks and lack of trust in cooperation with a lack in cooperation are determinants for value destruction, and the latter determinant is the fourth category for value destruction. The value destruction risks within alliances are based on differences in operating procedures and attitudes among partners and relational risks. Especially relational risks are of major importance. Relational risks relate with the importance of cooperation, which is discussed above. In fact, Elmuti and Kathawala (2001:209) state that relational risk is concerned with the probability that partner firms lack commitment to the alliance and possible opportunistic behaviour could undermine the prospect of an alliance.
Finally, performance risk is an important determinant for the alliances’ success. Elmuti and Kathawala (2001) argue that performance risk is the probability that an alliance may fail even with full commitment to the alliance. Das and Teng (1999) state that the sources for performance risk include environmental factors, such as government policy changes, war and economic recession; market factors, such as fierce competition and demand fluctuations; and thirdly internal factors, such as lack of competence and bad luck.
There are two manners in which acquisitions are conducted. The first and most usual form of an acquisition is a friendly one. A friendly acquisition arises when the acquirer and the target firm agree the terms together, and the target’s management recommends acceptance to its shareholders (Johnson et al., 2011). Bower (2001) adds that friendly performed deals perform well in stock, so regarding the shareholder interests friendly takeovers are profitable. In fact, Cybo-Ottone et al. (2000) state that there is a positive- and significant increase in stock market value for the average merger at the time of the deal announcement.
Johnson et al. (2011:329) argue that the second opposed form of acquisitions is done hostile, which means that acquirers offer a price for the target firm’s shares without the agreement of the target’s management. The outcome is decided by which side wins the support of
shareholders (Johnson et al., 2011). Cartwright and Schoenberg (2006:7) add that single hostile bids deliver higher financial returns than friendly- or multiple hostile bidders.
In terms of non-organic growth, firms are not always ensured of success. According to Cartwright & Schoenberg (2006), takeovers manage to ensure shareholders of acquired/target firms short-term return for shareholders whilst the long-term benefits for investors of acquiring firms are less stable. According to Conn et al. (2001) only 35-45% of the acquiring firms achieve positive return within the next three years after the takeover, combined with approximately 10% standard deviation around the mean return.
In order to ensure that the money is well spent strategic management is of vital importance. The main focus on strategic management in M&A research has been on the identification of strategic-, and process factors that explain performance variance between individual takeovers (Cartwright & Schoenberg, 2006:8). In fact, these scholars state that strategic management consists of three fields that enhance the success of takeovers when taken into account properly, and also determine the performance variance between individual acquisitions. The first aspect of successful acquiring firms is the “strategic fit” (Cartwright & Schoenberg, 2006). The strategic fit literature elucidates on the link between performance and the strategic attributes of the combining firms, especially to the extent of relation -businesswise- between the target firm and the acquiring firm (Cartwright & Schoenberg, 2006:8), whereas Scholz (1987:78) defines strategic fit as the situation in which all the internal and external elements relevant for a company are in line with each other and with the corporate strategy. Strategic fit enhances value-creation mechanisms related to resource sharing and knowledge transfers (Cartwright & Schoenberg, 2006), and Scholz (1987) states that strategic fit has seven elements that form the basic content: strategy, structure, systems, style, staff, shared values and skills. Strategic fit is not synonym for synergy, although it might use or produce synergy, in a broader perspective the strategic fit phenomenon represents the integrative nature of the overall strategy (Scholz, 1987). So, strategic fit is an overall picture in terms of the level of congruence between firms, and not avoidable in matters of effective non-organic growth. Another focus point within the strategic management field is the ‘process’ literature that reflects on the important role of the choice of integration strategy and the acquisition process itself can play (Cartwright & Schoenberg, 2006). This process of takeover is important because it is mainly expressed in terms of highlights that inappropriate decision-making, negotiation and integration processes may lead to inferior acquisition outcomes. In fact, Cartwright and Schoenberg (2006) state that organizational learning, the learning process from their prior acquisition experiences, is key in M&A activity.
The third aspect in strategic management, related to performance in M&A activity, highlights the importance of integration in terms of employees. The focus lies on M&A underperformance in terms of the cumulative dysfunctional impact of the event itself, it’s associated uncertainty and the subsequent process of integration on individual organizational members (Cartwright & Schoenberg, 2006:8). According to these scholars major reasons for M&A failure are poor cultural fit or lack of cultural compatibility. M&A failure therefore is expressed in terms of post-M&A performance and post-M&A cultural identification. Linking back to the strategic fit, the importance of good integration culturally may have big consequences. Therefore, Scholz (1987) links strategy with corporate culture in two ways. According to Scholz (1987:83) the ‘culture-system fit’ is guaranteed in most cases when the intra-culture fit is given. The interdependence between culture and system is for the system to make the culture and the system to behave according the corporate culture. In two cases the culture-system fit might not be given: either a large number of new employees are in conflict with the corporate culture, or the corporate culture has been changed recently and not everyone acts to the new corporate culture (Scholz, 1987). In M&A activity the acquiring firm has an existing corporate culture and a large number of new employees might be in conflict with the corporate culture. On the contrary, which is also possible, through the integration process, the corporate culture has recently been changed and the adaptation process has kicked in. The second fit defined by Scholz (1987) and a third option in terms of the congruence between corporate culture and integration is the ‘strategy fit’. The culture-strategy fit is said to be a problematic one since these components are independent of each other, and corporate culture might have direct influence on strategy formulation.
To continue on the second abbreviation in M&A, a merger (also equity) is the combination of two previously separate organisations, commonly as more or less equal partners (Johnson et al., 2011). Stahl and Voight (2005:54) state that in ‘mergers of equals (collaborative marriages), the cultures of the combining firms must be similar or adjoining types in order to integrate successfully’.
Johnson et al. (2011:330) argue that M&A’s are strategically opted due to three main motives. The first motive is ‘extension’, which is done in order to extend the reach of a firm in terms of geography, products or markets. The second motive is ‘consolidation’. M&A’s can be used to increasing market power by reducing competition, which can increase efficiency purposes by reducing surplus capacity or sharing resources, and increase of scale may increase production efficiency or/and bargaining power (Johnson et al., 2011). The third and final strategic motive explicated by Johnson et al. (2011) is ‘capabilities’. This motive reflects on increasing a
company’s capabilities in terms of innovative reach through buying smaller knowledge-intensive companies that stretches the parent firm’s (technological) portfolio.
The abovementioned strategic motives are extended with five main reasons to justify M&A’s (Bower, 2001): to deal with overcapacity through consolidation in mature industries, to roll up competitors in geographically fragmented industries, to extend into new products or market, as substitute for R&D and to exploit eroding industry boundaries by inventing an industry.
To complete the theoretical picture, Johnson et al. (2011) agree with Bower (2001) and add that the abovementioned strategic motives and in this case the five main reasons for M&A’s can be categorized in the successive five strategic M&A options: Diversification, Internationalisation, Innovation, Consolidating markets and Building scale advantages.
In fact, the first point of Bower (2001) aligns with the fourth strategic option of (Johnson et al., 2011). Secondly, Bower’s (2001) second strategic reason aligns with both Johnson et al. (2011) the categories consolidating markets, because through this M&A a pass towards market saturation occurs, and building scale advantages due to the fact that the increased market share and/or company size comes together with the possibility to make (production) processes or products and services cheaper. Thirdly, Bower’s (2001) M&A reason to extend into new products or markets is definitely aligned with diversification, but can also be aligned with internationalisation, when the new product or market is an international market or a product that is fabricated abroad, moreover it can also be linked to Johnson’s et al. (2011) category innovation, when through M&A’s an innovative tenure is created. Fourthly, Bower’s (2001) statement that M&A can function as a substitute for R&D is connected with Johnson’s et al. (2011) category innovation and can also be linked to the diversification category when picturing R&D in a broader perspective. Bower’s (2001) final strategic reason for M&A is to exploit eroding industry boundaries by inventing an industry. This fifth point is compatible with the categories innovation, and also positively to diversification.
These strategic options are all either location-related, firm related or market related when discussing M&A’s.
Although Hitt et al. (1990) are not in the same dimension as Johnson et al. (2011) and Bower (2001), given the fact that their theory is less abstract and focuses on firm-level strategy implementation, these scholars argue that there is a trade-off between growth by M&A and managerial commitment to innovation. Specifically, to the extent to which M&A’s serve as a substitute for innovation, increased use of leverage, increased size, and greater diversification may affects manager’s time and risk orientations. Due to these effects, managers may reduce
their commitment to innovation. Although Hitt et al. (1990) do not give direct implications towards the dimension time, they do not agree with Johnson et al.’s (2011) and Bower’s (2001) M&A justification theory.
Mutsihashi and Greve (2009:3) strongly disagree with Hitt et al. (1990) and argue that alliances have been documented in many industries, and have shown to affect outcomes such as innovation, and performance, noted that ‘for industry giants and ambitious start-ups alike, strategic partnerships have become central to competitive success in fast-changing global markets.”
The abovementioned strategic options can all, non exclusively, be applicable in three mainstream M&A theories that define economic outcomes in general and if M&A’s generate combined economic value, according to Weston et al. (2004) (Alexandrou et al., 2010).
These theories are: value increasing, value neutrality and value decreasing/destroying.
2.5 Strategic Alliances
The third inorganic development possibility is (international) the strategic alliance.
Sleuwaegen et al. (2003) speak of International Strategic Alliances when there is a co-operative agreement between companies from different countries, whereas Johnson et al. (2011:338) state that there can be spoken of strategic alliances when ‘two or more organisations share resources and activities to pursue a strategic goal’ and where it involves only partial change in ownership, or no ownership at all. Prashant and Harbir (2009:45) argue that firms engage in alliances to secure and extend their competitive advantage and growth. These scholars also state that alliances help firms strengthen their competitive position by enhancing market power, increasing efficiencies, accessing new or critical resources or capabilities, and entering new markets. Arino et al. (2001) state that strategic alliances are defined as the partnership of two or more organisations to pursue a set of private and common interests through cooperation and sharing of resources (Chang, 2013:48). Harrison and Van Hoek (2005) add that companies would have more opportunity to achieve effective performance if they develop strategic alliances with other companies doing similar businesses, and possibly even with some of its competitors (Chang, 2013:209). Midoro and Pitto (2000) agree with the effective performance phenomenon described by Harrison and Van Hoek (2005) and state that strategic alliances are beneficial due to the fact that these agreements can enhance wider geographical scope, the possibility to perform (vessel) planning and coordination on a broader scale, risk and investment sharing, economies of scale, new market entries, increase in frequency of services, and cost down through
combining purchasing power and volumes (Chang, 2013). Johnson et al. (2011:340) agree and add the definition of strategic alliances focuses on sharing, of resources or activities. Strategic alliances are can be twofold in terms of inter-firm relationships; non-equity or equity (Prashant & Harbir, 2009). Figure 2 gives a complete overview of the different types of strategic alliances.
Figure 2. Scope of interfirm relationships
Source: Yoshino and Rangan, 1995
Strategic alliances therefore are formed in order to achieve a higher level of benefits, but a systematic elucidation on the different types of strategic alliances is compulsory in order to understand the phenomenon correctly.
Johnson et al. (2011) argue that sharing is the key motivator for most alliances, but there are five broad rationales for forming strategic alliances: Scale alliances, where organisations combine forces in order to achieve necessary scale. Secondly, access alliances that are formed in order to gather access to capabilities of another organisation that are required in order to produce or sell its products and services. Thirdly, complementary alliances that can be seen as access alliances, but complement each other based on the particular firm-specific gaps or weaknesses. Finally, collusive alliances that stands for a secret collusion between partners in order to increase market power by combing together into cartels that reduce competition and that enables them to extract higher prices from customers and lower prices from suppliers (Johnson et al., 2005).
Obviously, collusive alliances are not legal according (international) regulation policies as anti-trust regulation, when it surpasses a certain amount of market share and therefore can be called a ‘cartel’. Harrison and Hoek (2005) argue that in terms of performance there is a
classification of partnership in three types and when achieved all, companies function at full strength. The three types of partnership features reflect on cooperation, coordination, and collaboration.
Alexandrou et al. (2014) give another insight on strategic alliances in terms of commitment and state that strategic alliances can be seen as experience for companies prior to acquiring. They insinuate that strategic alliances are most beneficiary when there is a time limit. In fact, according to James (1985:80) temporary alliances are enhanced cause long-term independence may weaken, rather than strengthen, a company’s activities since it can lose the ability and capacity to produce a fully integrated service. James (1985) elaborates further on the possible negative consequences when engaging in strategic alliances and states that there may arise difficulties to integrate experience, it may weaken accountability, slack communication, and there may occur loss of time due to joint decision-making.
In terms of negative effects Prashant and Harbir (2009) speak of the “alliance paradox”. Alliances are formed in order to secure or extend their competitive advantage or growth, but studies have shown that there is a 30% to 70% failure rate (Prashant & Harbir, 2009). These rates are based on firm alliances that never meet the goals of their parent companies or deliver the operational or strategic benefits they purport to provide (Prashant & Harbir, 2009).
M&A’s and strategic alliances may be a strategic step towards an increase in a firm’s success and these structures in general can be beneficiary when integration is successful.
2.6 Mergers, acquisitions and strategic alliances in the maritime Sector
As elaborated before mergers, acquisitions and strategic alliances have their benefits and their deficiencies. Within this section the general M&A and strategic alliance literature will be narrowed down and discussed within the shipping industry.
According to Chang (2013) four major types of risks are in play related to container shipping that every shipping company preferably tries to allay, alone or by M&A’s or strategic alliances. These risks are: technical risks, market risks, business risks and operational risks. Since 90% of the world’s trade is transported over sea (Moreira, 2013; Chang, 2013), M&A’s are mostly enhanced due to the creation of (further) economies of scale, due to larger ships and forming bigger fleets, and economies of scope, due to fleet composition, extended trade routes, and market coverage (Alexandrou et al., 2013; 2014). Heaver et al. (2000) agree and argue that economies of scale can be achieved, by increasing the volume of freight moved on a particular route. Moreover, fixed costs can be spread over a greater total traffic and serving shippers more effectively. Furthermore, there is greater control over the logistic chain and
improvements of services can be realized. Heaver et al. (2000) emphasize heavily on the reduction of costs, which according to these scholars goes through using larger vessels, limiting the number of ports of call for ships, improving the utilization of capacity and spreading corporate fixed costs over greater outputs. They conclude by stating that it’s all about competing for volume in terms of market share, which interrelates positively with bargaining power. In fact, they argue that a bigger market share increases bargaining power, also when achieved through vertical mergers and alliances (Heaver et al., 2000). Moreira (2013) also links economies of scale with bigger bargaining power, by arguing that the unitization of cargo and increased vessel capacity increases bargaining power towards aligned partners like ports and terminals due to the fact that ‘forces’ them to elevated processing time of container handling in order to respect ship turnaround times. Considering that the faster the vessel is unloaded, the faster the vessel will be up and running again. Therefore, alliances are formed ad-hoc basis to deal with specific situations generally linked to (product) access and market control (James, 1985). Freemont (2007) adds that alliances are formed in order to possess sufficient capacity on the major East-West route, and the forming of these major alliances may even push Maersk, the market leader on these routes, into second place. Furthermore, the most important strategy in terms of efficacy is slot exchange, slot charter, a joint fleet, and ship charter with other container shipping companies (Chang, 2013). In addition, maritime sector alliances between shipping companies and further supply chain partners are performed in order to share financial responsibilities, for conflict avoidance, and to overcome the instability in container shipping (Heaver et al., 2000; James, 1985). An important side note regarding alliances is that the bigger a company is compared to the target company, the better the chances for successful implementation (Alexandrou et al., 2014). Bower (2001) makes a nuance between M&A and strategic alliances, stating that alliances are assumed to be unworkable whether M&A’s are the growth path preferred by shipping firms. Nevertheless, alliances are of great value when the carriers involved are able to integrate their vessel operational activities (Heaver et al., 2000) and due to the current market conditions firms face a competitive situation of which alliance strategies are a fundamental component (James, 1985). In order to comprehend the tendency for Maersk, MSC and CMA CMG to achieve the completion and success of P3, it is fundamental to note that ‘alliances are dependent on the ability of members to sustain their commitment of the alliance through a mutuality of interest and alliances can be weakened by the changing interest of the members (James, 1985:77).
2.7 Inside the P3 Alliance
Forming an alliance can have negative sides, which are discussed above.
Nevertheless, the P3 alliance is formed based on the positive expectations that may occur when partnering-up. Especially because strategic alliances form efficiencies of scale in terms of a joint fleet (Alexandrou et al., 2014, Chang, 2013; Midoro & Pitto, 2000; Cullinance & Khanna, 1999), larger ships (Alexandrou et al., 2014; Cullinance & Khanna, 1999) and economies of scope like fleet composition (Alexandrou et al., 2014), extended trade routes (Alexandrou et al., 2014; Wastler, 2013) and extensive market coverage (Alexandrou et al., 2014; Bower, 2001; Chang, 2013; Heaver et al. 2000; James, 1985).
Cullinance and Khanna (1999) emphasize that joint services benefit significantly in terms of economies of scale when ship sizes are above 8,000 TEU for Europe-Far East and Transpacific Trade, and when above 5000-6000 TEU on the shorter transatlantic Trade. Especially regarding economies of scale Maersk is performing well by introducing the new Triple E line, which according to Alexandrou et al. (2014) saves up to 750,000 British pounds from Shanghai to Rotterdam. This is far above the 8,000 TEU mentioned above and due to P3 Maersk has formal allies that reduce the overcapacity problem mentioned by Wastler (2013). The Triple E line is an engineering wonder and stretches out over 395 metres, these ships therefore are the largest ships in P3 and worldwide. But also MSC and CMA CMG have multiple 300+ metre vessels, so in terms of magnitude these partners compete in the same category.
Moreover, reducing costs, better services and faster transports do not stop at enlarging ships or fleets, but nowadays shipping companies, or alliances, are seeking to provide door-to-door integrated transportation services and are pursuing closer integration along the transportation chain (Bower, 2001), which generates an increase of power of shipping companies because a door-to-door service is more influential in terms of cost levels (Heaver et al., 2000). Door-to-door services are partnerships with trustworthy independent hinterland (inland) operator at contract base (Baird & Lindsay, 1996). Besides a door-to-door service (contract), port clearance is extremely important. According to Notteboom (2006) container shipping companies undergo partnerships with ports to reduce the impact of port congestion, which is the main source of schedule unreliability and therefore decrease the chance of late delivery due to the fact that there is an achievement-agreement that sorts out arbitrariness of port handlers to unload these vessels. For example, the magnitude of P3 is huge given the fact that MSC, CMA CMG and Maersk have multiple aligned ports, the door-to-door services expands exponentially.
2.8 Legal features
The leading economic perspectives and economic laws are not the only processors within the field of mergers, acquisitions and strategic alliances due to the fact that these are all bound to a national- or supranational legal framework.
The legal boundaries are set to facilitate an equal and level economic playing ground, in order to clarify the rules of the game, both in the maritime world as in every other sector thinkable. Moreover, both we can speak of an interrelatedness between the two fields due to the fact that there is a legal perspective in economics and an economic perspective in law. Apart from the connections between the two fields, the legal framework is to be seen as the ideological and moral backbone that justifies the abstraction of every practical (economic) move.
In order to give a full description and understanding of the legal boundaries and guiding principles within the legal field, there will be an elucidation on both the historical perspective on (mostly) maritime law and today’s leading rules.
2.8.1 Maritime law in past perfect
The ocean shipping industry is among the first to utilize the concept of co-operative behaviour in the quest for achieving particular business objectives (Panayides & Wiedmer, 2011). Lu, Cheng and Lee (2006) add that besides vertical integration of transport operations, the main activity comprises horizontal agreements for sharing fleet and route services.
In order to regulate and protect the interests of on the one hand the economic actors within these fields, as on the other hand the consumer at the end of the supply chain, there was the introduction of two types of measures; restrictive trade policies and private anticompetitive practices (Fink, Mattoo & Neagu, 2002). These authors state that restrictive trade policies are policies set up restrictively to regulate horizontal- and vertical agreements in general, where private anticompetitive practices prevent or reduce competition in a market.
In addition, Fink, Mattoo and Neagu (2002) argue that restrictive trade policies keep maritime transport costs high.
An interpretation of restrictive trade policies features the General Agreement on Trade in Services (GATS). The GATS deals with anticompetitive business practices to ensure that collusive pricing does not erode the gains from liberalization (Fink, Mattoo & Neagu, 2002). On supranational level there is the article 101 of the Treaty on the Functioning of the
European Union (TFEU), established by the European Commission, the process of the Federal Commission (FMC) and the Chinese authorities, which will be discussed later on.
As discussed before, within maritime transport services there are three types of activities. Only within this section the restrictions and legal boundaries will be further elucidates. These three activities are international maritime transport, maritime auxiliary services and port services.
International maritime transport consists of freight and passenger transport. Secondly, maritime freight transport consists of liner shipping, which is mostly containers, and is best described as maritime transport of commodities by regular lines that publish in advance their calls in different harbours.
Maritime freight transport also consist of tanker shipping, which is mostly tanker, dry bulk, oil and raw materials, that is defined as transport reformed irregularly, depending on demand (Fink, Mattoo & Neagu, 2002). The main difference between these two forms of freight transport is that liner shipping is more regular and predefined based on long-term supply and demand, whereas tramp shipping is more short-term supply and demand resulting in loads often changing ownership whilst transported.
The second form of activities, maritime auxiliary services consists of any activity related to cargo handling in ports and on ships.
The third forms of activities, port services, are activities related solely to ship managements in ports (Fink, Mattoo & Neagu, 2002).
According to WTO (1998) tramp shipping is a fairly competitive market, and mostly free from restrictions, whereas liner shipping has traditionally been subject to both private cartel-like arrangement and government restrictions.
Relating back to the legal perspective in these forms of maritime transport services, the main focus lies on liner shipping, which has been subject to plural legal restrictions.
Back in the 80’s and 90’s there were strong restrictions within multiple fields related to maritime transport, these restrictions are as follows.
Restrictions related to the first maritime transport category, international maritime transport, were the cargo reservation schemes (Fink, Mattoo & Neagu, 2002).
These schemes require that part of the cargo carried in trade with other states must be transported only by vessels carrying the national flag or are interpreted as national regarding other criteria, which would be justified by either security (self-sufficient in times of war) or economic (infant industry) concerns (Fink, Mattoo & Neagu, 2002:84).
According to these scholars (2002) these schemes could be imposed either unilaterally, which comes down to ships flying the national flags are given the exclusive right to transport a specified share of the cargo passing through the country’s ports, or bilaterally/ multilaterally.
Bilaterally/ multilaterally cargo reservation schemes have been subjected to a United Nation conference on Trade and Development, the UNCTAD. This Liner code of Contract was adopted in 1974 and entered into force in 1983 and was ratified in more than 70 countries. This GATS was meant to counteract the anticompetitive actions of liner conferences, which could be best described as “two or more ocean common carriers, providing for the fixing of and adherence to uniform tariff rates and conditions of service” (Fink, Mattoo & Neagu, 2002:85).
Container shipping conferences are held in order to enhance price stability, as well as long term supply stability, which would be indispensable for reliable services, and shippers claim that conference price-setting is a low cost mechanism to self-regulate a network industry such as container shipping, which is vulnerable to destructive competition (Haralambides, 2004). According to Sjostrom (1989) shipping conferences should be allowed, not as monopolizing cartels, but to ensure that shipping services are provided in a market in which there is no competitive equilibrium (Francois & Wooton, 2000).
Cariou and Wolff (2006) add that a direct relationship between concentration and price is difficult to assess, whereupon Damas (2004:78) reacts by stating that conferences may look like, but do not act like cartels referring to the duopoly of Airbus and Boeing in aviation. Cariou and Wolff (2006) add that individual shipping companies appear to have a larger potential for tacit collusion than conference members in setting freight rates.
In fact, the UN has always disagreed and required cartels, both unilateral and multilateral, to divide to the following rule; 40% of the cargo should belong to the exporting country, 40% to the importing country and max. 20% to other countries. The policy was set up in order to facilitate development of the shipping industry of development countries. However, the implication of this GATS could be enormous, it was mostly applied on routes between West-Africa and Europe (Fink, Mattoo & Neagu, 2002).
The results of Fink et al.’s (2002) study show that the indicators of cost-based pricing have greater explanatory power after liberalization, than the indicators of demand-based pricing, in fact the GATS resulted to be inefficient.
Palsson (1997) adds that after abolition of the GATS led to evidence in increased competition in the container industry, a decline in shipping rates in Europe from 20-25% and in the United States 25-35%.
The tendency of policy restrictions related to the maritime sectors are ideologically-wise towards egalitarianism and structurally against gathering of actors in terms of negative
cartel-forming, whilst the tendency of economic actors within the maritime sectors is structurally gathering in terms of conferences and alliances in order to lower costs, enhance efficiency and increase their network, which is cartel-forming in a positive way.
Secondly, restrictions related to the second maritime transport category, the maritime auxiliary services, are price-fixing and other cooperative agreements.
Fink et al. (2002:87) emphasize again what already has broadly been discussed before, by stating that maritime carriers enter agreements, which help them to enjoy advantages that arise from cooperation on technical- or commercial matters. They add that collusive habits are deeply rooted in the history of maritime transportation.
An important example of restrictions towards cooperative agreements and price fixing is the US Shipping Act that was established in 1984. This 1984 reform refrains a twofold of implication for carriers and the maritime sector in general.
Primarily, ocean carriers have to file their rates with the FMC and publish their rates and schedule information, but also discounting on the filed rates became illegal (Fink, Mattoo & Neagu, 2002).
Secondly, the FMC was authorized to fine offenders in order to ensure that the filed rates were actually charged.
This policy was implemented in order to enlarge transparency and to contravene conferences and moreover, collusive agreements between carriers.
An important study executed by Clyde and Reitzes (1995) shows that there is no significant relationship between freight rates and the market share of conferences serving on a route. Moreover, they find that the level of freight rates is significantly lower on routes where conference members are free to negotiate service contracts directly with shippers.
The negative consequences of the 84’s Shipping Act were enlightened in the upcoming 15 years, and the Shipping Act by the Ocean Shipping Reform Act, or OSRA, was formed in 1999.
The biggest change between these two reforms was the shift away from public tariffs and publicly available contract rates, to confidential rates using individually negotiated service contracts, which naturally led to an enormous increase in individual member service contracts and this reform instilled more competition into the market (Panayides & Wiedmer, 2011). These scholars argue that there has been a change of rate structure after 1999. Until mid 1999 there was a difference between the eastbound and the westbound routes. The carriers
operating on the eastbound routes were charged with a premium in comparison with the westbound route, since the eastbound route suffered from overcapacity (Panayides &
Wiedmer, 2011). This liberalization act improved competition and pricing drastically, which resulted in lower rates on the eastbound route resolving the overcapacity problem (Panayides & Wiedmer, 2011). With deregulation the market forces resulted in a healthier maritime sector (European Commission, 2005:154).
Thirdly, restrictions related to the third maritime transport category, the port services, were port and auxiliary services restrictions.
These port services tended to be completely monopolized. Liberalizing these services had two aspects: to ensure that foreign ships serving the domestic market obtain non-discriminatory access to such services and to allow competition, both domestically as foreign, in the supply of this service (Fink, Mattoo & Neagu, 2002).
After 1999 there haven’t been any major new policies with a global impact; the composition of today’s market is based on leading European, American and Asian rules and the honoured principle of economics.
2.8.2 Todays Legal framework
The most important route is the eastbound route for the US and the westbound route for Europe, seen from Shanghai. Shanghai has the world’s biggest port and is one of the busiest hubs today. Additionally, there are three leading organs that have direct influence on carriers and the maritime sector in general: the Federal Maritime Commission, European
Commission, and primarily the Chinese authorities. These three organs all have a different perspective on trade an how to test the allowance of cooperating economic actors.
The rule of thumb is nor mergers, nor acquisitions, nor strategic alliances may have a
combined market share that exceeds 30% of the total market, there are block exemptions and the process for each individual organ is set up as follows (European Union, 2010).
The FMC relies on publicly litigating the cause, where parties are allowed to speak up their beneficiary- or conflicting opinions. This process is based on transparency and a formal acceptance or decline is processed.
The European Commission does not trial the cooperating intensions of parties, but they act highly passively. There is no judgement whether mergers, acquisitions or (strategic) alliances are legal or illegal. The European Commission only starts investigating a cause when appears that there might be collusive economic activity within these alliances. In case this happens fines are imposed and the worse case scenario would be disallowance of the alliance. Thirdly, the Chinese authorities either decide to allow or to decline a partnership and that would be all.
It is important to take notice of the fact that these organs only have a voice when there are economic interests at stake, in the case of P3 and G6 this points at the loops these partnerships try to establish.
From an European based view we focus primarily on the legal principles that overarch national law, and the most important article is 101 of the Treaty on Functioning of the European Union (TFEU).
Article 101, former article 81 before the Treaty of Lisbon, established by the European Commission overarches all sorts of consortia and fundamentally regulates the ways consortia are structured legally (EPSI, 2009). There will be a complete explication of the article due to the fact that this is the most important article related to consortia in the form of mergers, acquisitions and (strategic) alliances.
The European Commission (2008) established the article 101 TFEU as follows:
1. The following shall be prohibited as incompatible with the internal market: all agreements between undertakings, decisions by associations of undertakings and concerted practices which may affect trade between Member States and which have as their object or effect the prevention, restriction or distortion of competition within the internal market, and in particular those which:
(a) directly or indirectly fix purchase or selling prices or any other trading conditions;
(b) limit or control production, markets, technical development, or investment;
(c) share markets or sources of supply;
(d) apply dissimilar conditions to equivalent transactions with other trading parties, thereby placing them at a competitive disadvantage;
(e) make the conclusion of contracts subject to acceptance by the other parties of supplementary obligations which, by their nature or according to commercial usage, have no connection with the subject of such contracts.
2. Any agreements or decisions prohibited pursuant to this Article shall be automatically void.
3. The provisions of paragraph 1 may, however, be declared inapplicable in the case of:
- any agreement or category of agreements between undertakings,
- any decision or category of decisions by associations of undertakings,
- any concerted practice or category of concerted practices,
which contributes to improving the production or distribution of goods or to promoting technical or economic progress, while allowing consumers a fair share of the resulting benefit, and which does not:
(a) impose on the undertakings concerned restrictions which are not indispensable to the attainment of these objectives;
(b) afford such undertakings the possibility of eliminating competition in respect of a substantial part of the products in question (European Commission, 2008).
The abovementioned article is to be seen as the overarching rules of the game. In fact, the clear message within the 101 Treaty is that any form of obstructing actions, either in the form of consortia, or as individual actor, is strictly forbidden.
Nevertheless, within the form of consortia or individual economic performance that is discordant with the Treaty, but does enhance consumer benefit, is part of block exemption regulation (European Union, 2010).
According to the European Union (2010) the hardcore restrictions therefore are concerns towards resale price maintenance. Secondly, restrictions concerning the territory into which or to the consumer whom the buyer may sell. Thirdly, restrictions towards selective distribution, to selected customers while they are being prohibited to sell unauthorized distributors, cannot be restricted in the end-users whom they may sell. Fourthly, those appointed distributors must remain free to sell or purchase the contract goods to or from appointed distributors within the network. Finally, concerns the supply of spare parts. So, an agreement between a manufacturer of spare parts and a buyer which incorporates these parts into its own products may not prevent or restrict sales by the manufacturer of these spare parts to end users, independent repairers or service providers (EU, 2010).
Another important feature related to article 101 of the Treaty of the European Commission aims at the boundaries related to (accumulated) market share.
The European Union (2010) states that a vertical agreement is covered by BER3 if both the supplier and the buyer of the goods or services do not have a market share exceeding 30%. In fact, the regulation applies to all vertical restraints other than the abovementioned hardcore restraints.
The European Commision (2008) states that in case conditions are not fulfilled, these restraints are excluded from the block exemption regulations, but only the parts that exceeds the 30% market share boundary, and therefore continues to apply on the part of the vertical agreement that can operate independently from the non-exempted vertical restraints.
3.1 P3: Alliance of Maersk, MSC, and CMA-CMG
The New World Alliance will be replaced by a real world alliance, which is named P3. P3 is a not a merger, nor an acquisition, but a strategic alliance between the three biggest container companies of the globe: Maersk, Mediterranean Shipping Company (MSC), and CMA-CMG (Moreira, 2013; Chang, 2013; Lloydslist, 2013; Wastler, 2013).
Figure 3. Vessel contribution of P3 participants
Source: http://www.lloydslist.com/ll/topic/p3network/article427852.ece/BINARY/the_p3_network.pdf
P3 is meant as an alliance between these container carriers on the routes connecting North America, Europe and Asia (Wastler, 2013). Essentially, the P3 alliance is a reciprocal service within the triad that is meant to fill vessels with overcapacity navigating under a certain company flag in order to pool equipment, which allows them to offer more frequent service to more ports (Wastler, 2013), and more importantly economies of scale (Heaver et al., 2010). Another essential increase in efficiency is the span of available ports within the P3 network, since that shipping companies are aligned to certain ports (Heaver et al., 2010) (MSC to Antwerp, Maersk to Rotterdam, and CMA-CMG to Le Havre). In practice, the port expansion
3 Block Exemption Regulation
that would be realised by forming P3, would most definitely increase the possibilities for vessels and line-services to berth, which would increase service-diversity and better reach for hinterland services. Hinterland services will be better explained further on in the paper. As elucidated in figure 3, the partitioning of the vessel-contribution between the triad is respectively 42%, 34%, and 24% (Alphaliner, 2014). As discussed before the world shipping company-ranking is made up of TEU capacity and the number of vessels within the fleet. According to the official ranking4 the quotes of the participant shipping lines are quite evenly displayed regarding the contribution to the alliance. The initial P3 capacity is set on 255 vessels of 2,6 million TEU that will be deployed on 29 routes (Alphaliner, 2014). Therefore, through expansion and deliberate services the aim of P3 is at three main features; coverage, frequency, and stability for customer ends whilst this goes hand-in-hand with cost-leadership and cost-oppression for the shipping companies (Wastler, 2013).
Therefore, the strategic alliance carried under the name “P3” aims ideologically at reducing carrier costs, whilst upgrading the (combined) service.
According to Alphaliner (2014) the scope of the shipping lines individually are as follows. Maersk has a maximum capacity of 2,596,412 TEU accompanied by a 572 vessel-counting fleet. Maersk has full ownership of 1,442,615 TEU and 246 ships and charters 1,153,527 TEU and charters 326 ships. The percentage of ships chartered by Maersk is 44,4%. These figures reflect on the amount of vessels and TEU’s that are actually owned or hired by the shipping company, and are further reflected in the appendix (Alphaliner, 2014). It is common to charter/ make use of vessels and TEU’s that belong to other shipping companies in order to reach a higher level of efficiency, given the fact that chartering is cheaper and more flexible than having full ownership in some cases. Therefore, every shipping company makes use of this construct.
Secondly, MSC has a maximum capacity of 3,362,854 TEU accompanied with a fleet of 472 ships. MSC has full ownership of 1,046,585 and full ownership of 191 ships and charters 1,361,219 TEU and 281 ships. The percentage of ships chartered by MSC is 55,7% (Alphaliner, 2014).
Finally, CMG group has a maximum capacity of 1,511,472 TEU and 428 ships. CMA-CMG has full ownership of 526,288 TEU and 83 ships, whereas CMA-CMA-CMG charters 985,184 TEU and 345 ships. The percentage of ships chartered by CMA-CMG is 65,2%.
The link between the inputs of the container carriers and their ‘private’ fleet is that the biggest company with the biggest amount of ships contributes the most. According to Macquiry
4 The Alphaliner top-100 leading container shipping lines is displayed in the appendix.
